Like most tech stocks, Chegg Inc. (CHGG) had been a pandemic winner in 2020 and the first half of 2021. The company has been growing its revenues and operating income comfortably over the years, and possesses several competitive advantages in this dynamic market. Like most tech stocks, Chegg stock has been substantially declining, down nearly 75% from its position a year ago.
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Though it might stay volatile in the near-term, Chegg’s business model allows the company to continue enhancing its sales and profitability over the long-term. Thanks to the massive sell-off in shares, some analysts also believe this might be an attractive opportunity to buy the Chegg stock as this fundamentally strong business is now trading at a discounted valuation. I am neutral on Chegg.
Chegg is a California-based education technology company that maintains an e-learning platform and tutoring services. Chegg’s services are subscription-based, and include Chegg Study, Chegg Writing, Chegg Math, and Chegg Study Pack.
With many individuals locked up at home during the pandemic, it was boom time for Chegg as many students turned to the company for its learn-from-anywhere services. But such a high growth phase would be short-lived, and as the economy started reopening, Chegg’s growth began declining. However, the company already boasts millions of engaged subscribers, and its content is capable of attracting a large number subscribers through low-cost or free channels like search engines without spending a fortune on marketing costs. Both of these factors bestow the company with some substantial competitive advantages.
Arvind Ramnani of Piper Sandler recently downgraded Chegg to a Hold after the company indicated that there is diminished visibility for its business trends stabilizing or improving. The analyst added, “If Fall 2022 enrollments and student behavior do not improve, we believe this ‘transition year’ could bleed into next year.”
Great Financials
Over the past five years, Chegg has experienced strong growth as it steadily scaled up its operations. With the gradual increase in demand for its services and materials, the company’s revenues have grown at an average pace of 20% every year from $255 million in 2017 to $776 million in 2021. However, despite such revenue growth, the biggest concern for investors is its ongoing lack of profitability.
Earlier this month, the company released its Q1 2022 earnings, where it posted revenue and non-GAAP Net Income of $202.2 million and 50.5 million, respectively. This indicates year-over-year growth of only 1.9% and 8%. Service revenue, which constitutes 91% of the company’s total revenue showed a 14% increase, while the service subscribers market grew by 12% to 5.4 million during that period.
While revenue and income did beat the market’s expectations, they were not in accordance with the company’s prior guidance. Chegg’s management has attributed such low growth to the geopolitical and economic turmoil the world is facing these days, along with the rising inflation levels and interest rate rises. For this ongoing quarter, the company expects net revenue between $188 million and $192 million with a gross margin range of 76-77%. Further, revenue for the current year might not match up with last year and is expected to be between $740-$770 million.
On Tipranks, 2 out of 13 analysts have given the Chegg shares a Buy rating, and 11 of them have assigned a hold to its shares. Chegg’s average analyst price target is $22.56 which represents a 16.65% upside from current levels.
Knocked Down, but Still Innovating
While Chegg has taken considerable hits to valuation, the company has continued to manage to grow. The company already has around 7.8 million subscribers and has been continuously focusing on strengthening its competitive advantage. It has developed original content from its user feedback, and this month it also launched a Center for Digital Learning to enhance the online, in-person, and hybrid modalities while supporting the educators at the same time.
Conclusion
In this current market condition, Chegg might be struggling to beat its former pace of growth, but the stock does bring a favorable buying opportunity to the interested investors. This is owing to its solid fundamentals and low-cost asset-light business model. Therefore, keeping in mind its wide scope of expansion, it might be worthwhile to hold this stock at the moment when it is poised for growth in the long-term.
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